Will Investors Buy into Operation Twist
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Yesterday, the Federal Reserve concluded its two-day meeting with the widely anticipated announcement of “Operation Twist.” This program involves the selling of shorter-term Treasury securities and the buying of longer-term securities in an effort to lower long-term interest rates to help stimulate the economy. The Federal Reserve cited “significant downside risks” to the economy as the reason for taking this action.
Following the Fed’s announcement, markets worldwide sold off sharply. Yesterday, the S&P 500 Index declined rapidly as the markets closed, down 2.94%. Selling pressures gained momentum overnight and led to global sell-offs, including a 4.90% decline in European stocks. This afternoon, U.S. stocks were down 3.5% and U.S. Treasury bonds were rallying as the bellwether 10-year note was trading at an all-time low of 1.76%, as investors fled to safety.
Since the U.S. debt downgrade, the S&P 500 has remained in a 100-point trading range between 1,120 and 1,220, with volatile swings fueled largely by the uncertainty of the European debt crisis and the anticipation of the Fed’s monetary actions.
Our long-term outlook for the world economy continues to be one of below-average growth, with the risk of inflation on the rise. Our asset allocation in our diversified managed portfolios is overweight U.S. large-cap stocks, high-yield bonds and precious metals. We continue to maintain an underweight in international equities and investment-grade bonds.
As we have said in past commentaries, sell-offs such as this may create opportunities for long-term investors who can take advantage of undervalued securities. If investors believe they are being well compensated for the risks they are taking, low prices today may represent tomorrow’s bargains. At today’s levels, certain stocks look increasingly attractive relative to bonds. Currently the S&P 500 has a dividend yield of 2.31%, exceeding all Treasury securities maturing in less than 15 years.
We encourage members to stick to their established financial plan. Members who change their risk profile to a more conservative profile solely because of the Fed’s action may be doing so at the wrong point in the market cycle. While painful in the short-run, we expect the volatility to continue. History tells us that market crises are often looked back on as opportunities. If you have questions about your investments or your financial plan, please call a USAA advisor at 1-800-531-8722.
This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance is no guarantee of future results. Investing in securities products involves risk, including possible loss of principal. As interest rates rise, existing bond prices fall. Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and political instability. Non-investment grade securities are considered speculative and are subject to significant credit risk. They are sometimes referred to as junk bonds since they represent a greater risk of default than more creditworthy investment-grade securities.
Precious metals and minerals is a volatile asset class and is subject to additional risks, such as currency fluctuation, market liquidity, political instability and increased price volatility. It may be more volatile than other asset classes that diversify across many industries and companies. The S&P 500 Index is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all stocks publicly traded in the United States. Most of these stocks are listed on the New York Stock Exchange. Indexes are unmanaged and you cannot invest directly in an index. Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.
Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.
